Quite a number of official sources have claimed in the past month that the stress test announcements on 31st March, 2011 have been greeted positively by the market. Minister of State at the Department of Finance, Brian Hayes told a conference on Friday last “these [stress test] exercises were characterised by a high degree of transparency and the input of highly respected international consultants, and as a result have been well received by the market”. Yesterday, governor at the Central Bank of Ireland, Patrick Honohan said on RTE radio (podcast available here) that “the reaction of the markets to the latest stress tests where we put our hands up and said we had not put in enough capital and we will need put in a lot more capital and we gave a lot more detail and a lot more precision about it I think the markets’ reaction which has been very favourable shows that our credibility with the markets is not been damaged in the way that you imply”. And on 6th April, 2011, speaking in the Dail, Minister for Finance, Michael Noonan delivered an upbeat assessment of the reaction of the bailout citing three examples which he claimed quantitatively showed that the market reaction had been positive. This entry examines those quantitative measures and concludes that we are really in no better a position today than we were in March.
The three metrics in Minister Noonan’s statement to the Dail which he claimed evidence the positive reaction of the market were
(1) The yield demanded by investors for our 10-year bond. On 31st March, 2011 just before the stress test announcements, the bond closed at a record 10.22% mid-point. And in the following days it steadily came down which indeed did indicate a positive market response. Indeed by 12th April, 2011 the yield had come down to 9.08%, which is still in unsustainable territory (the accepted wisdom is that rates over 6% are unsustainable). But since mid April, 2011 the yield has increased again and on 29th April, 2011 closed at a record 10.57% though in recent days it has come down slightly and this morning is trading at 10.3%. The graph below illustrates the mid-point closing prices in the last three months. Based on this metric, I don’t think you can conclude the market reaction is positive.
(2) The share prices of our banks which were subjected to stress tests. In fact the Minister in his presentation to the Dail only referred to the share price of AIB and Bank of Ireland which have been chosen as pillar banks. Irish Life and Permanent, the bancassurer’s future is not certain. On 31st March (actually 30th March because remember we suspended trading in the shares for a day), AIB’s share price closed at €0.19 and BoI’s at €0.22 – both record lows in 2011. Again in the week immediately following the stress test announcements, the prices increased, in AIB’s case to €0.33 and BoI’s to a high of €0.34. Since then the shares have drifted back down and closed on Friday at €0.22 and €0.25, certainly no different to the range of prices available in March 2011 as the table and graph below demonstrates.
(3) Deposit flight from the six State-guaranteed financial institutions (actually four now that Anglo and INBS have sold their deposit business, the four being AIB, Bank of Ireland, EBS and Irish Life and Permanent). Minister Noonan’s choice of wording was curious and equivocal which was in itself curious because he is one of the most articulate politicians you will find, and not just in Ireland. Minister Noonan said at the start of April “the total amount of deposits withdrawn from the pillar banks has been very significantly reduced. Since Thursday’s announcements, the net deposit position of the Pillar Banks has improved significantly”
We are unable to confirm if this is still the position. That is because the stress test announcements were made after close of business on 31st March, 2011. It will not be until the end of this week (the second Friday in each month) that the Central Bank ofIrelandproduces financial information for March and even then it won’t show the deposit position in the State-guaranteed banks. We will need wait until 31st May for that information. What we can say is that if the deposit position had continued to improve, we might have expected some unscheduled comments from the CBI or Department of Finance. Unverified anecdotes suggest deposits do continue to decline.
So based on the above metrics, you might conclude that the market response to the stress test and bank restructuring announcements has not been positive. We seem to be in no better a position that in March. In truth though, it is arguable that the deterioration that followed the immediate aftermath of the announcements has less to do with Ireland and more to do with the fact that Portugal applied for a bailout on 8th April and Greece’s position has deteriorated with a negative revision to its finances and what now seems like a certainty that the country will restructure and/or default. So you could argue that we have been buffeted by the slipstream ofGreeceandPortugal’s woes. But equally, I think it is difficult to defend the statement that the market is now reacting positively to the stress test announcements.
May I reiterate my pronouncements on this subject once again “Mr Honohan did exactly what he was asked to do, he was put in this job to try and fool the international markets effectively sell a pig and a poke. His reputation is shot full of holes and I wouldn’t trust him with my weekly shopping list. Financial fundamentals were totally ignored and this man must accept his part in selling out our country. Shame on him and again I call on him to resign. Strike that “Fire Him” instead!
It appears that the dim former rugby players in Ireland were all fooled by the performance put up by the Minister et al at the beginning of April, but the foreign loan sharks were not impressed enough to continue the temporary recovery.
The share prices and interest rates show that internationally, the financial world has lost confidence in Ireland. The deposit flight shows that domestically, the Irish have lost confidence in Ireland too. The world and its wife has no confidence in the Government or its financial plans, yet the Government persists in taking the country down this futile road to utter bankruptcy.
I sometimes wonder what happened to FG after they came to power. Within weeks, they were spouting FF’s old lines about ATMs and paying the Guards. I believe that the Government TDs were subjected to a lobbying offensive by the ECB and/or Irish Civil servants, and moreover, that the statements made at the beginning of April were a part of what was effectively an organised PR campaign by those supporting the bailout. I still believe that the Minister was being liberal with the truth and that the record will ultimately prove this.
Well, the Irish might have been fooled, for a while. But the money men were not. The country is not going to get out of this mess with bluff and bluster anymore.
Bank of Ireland have sold their $1.6 billion US loan book for approximately 84c on the dollar. AIB currently selling their $3 billion US book. There is a lot of interest in it.
@WSTT, aah, so the deleveraging begins. It’s a pity the nearly-400 page BoI annual report – see link below – doesn’t provide any geographical analysis of its €114bn net loan book. We might then see how this claimed deal stacks up with the existing provisions. But 84c on the dollar for the *face value* of the loans would seem problematic for BoI. After all, the bank only had a €5bn provision for losses on €119bn of loans at the end of 2010 which would imply an average value of 96c in the euro.
AIB is little better with its geographical analysis and again it’s nigh impossible to see the nominal value, impaired value and provision for the USA at the end of 2010
It’s not worth a separate entry because there’s so little real information in it, but the Independent reported yesterday that Anglo was set to start disposing of its US loan book (USD $ 12bn/€8bn secured on 640 properties) by the end of this year, having already completed a review of the loans book by Eastdil and HFF. The article also reports that contrary to recent suggestions, Anglo may indeed need additional capital, presumably in excess of the €29.3bn already committed in the baseline case. There is no word on the the timing of the releasee of the stress test results for Anglo/INBS though we were previously looking at a release in May 2011. Minister Noonan repeats a commitment to inject the €24bn into the banks by the end of July 2011.
Anglo is also preparing to dispose of its UK loanbook. Its Irish loanbook is being sat on for the time being because of “uncertainties” in the market (perhaps UORR changes)
http://www.independent.ie/national-news/noonan-to-force-sale-of-euro8bn-in-anglo-us-assets-2647545.html
The word on Wall Street was that Bank of Ireland’s US loan book was relatively healthy and that there was a lot of competition for it. My source thought that it was a good price.